1. The External Environment
Chapter 2
The External Environment
Copyright © 2004 South-Western All rights reserved.

2. Knowledge Objectives
Studying this chapter should provide you with the strategic management knowledge needed to:
Explain the importance of analyzing and understanding the firm’s external environment.
Define and describe the general environment and the industry environment.
Discuss the four activities of the external environmental analysis process.
Name and describe the general environment’s six segments.
Identify the five competitive forces and explain how they determine an industry’s profit potential.
Copyright © 2004 South-Western. All rights reserved.

3. Knowledge Objectives (cont’d)
Studying this chapter should provide you with the strategic management knowledge needed to:
Define strategic groups and describe their influence on the firm.
Describe what firms need to know about their competitors and different methods used to collect intelligence about them.
Copyright © 2004 South-Western. All rights reserved.

4. The Strategic Management Process
Copyright © 2004 South-Western. All rights reserved.
Figure 1.1
Copyright © 2004 South-Western. All rights reserved.

5. The External Environment
Copyright © 2004 South-Western. All rights reserved.
Figure 2.1

6. General Environment
Dimensions in the broader society that influence and industry and the firms within it
Economic
Sociocultural
Global
Technological
Political/legal
Demographic
Copyright © 2004 South-Western. All rights reserved.

7. Industry Environment
Set of factors directly influencing a firm and its competitive actions and competitive responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry among competitors
Copyright © 2004 South-Western. All rights reserved.

8. Competitor Environment
All of the companies that the firm competes against.
Copyright © 2004 South-Western. All rights reserved.

9. Analysis of the External Environments
General environment
Focused on the future
Industry environment
Focused on factors and conditions influencing a firm’s profitability within an industry
Competitor environment
Focused on predicting the dynamics of competitors’ actions, responses and intentions
Copyright © 2004 South-Western. All rights reserved.

10. Opportunities and Threats
Opportunity
A condition in the general environment that if exploited, helps a company achieve strategic competitiveness
Threat
A condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness
Copyright © 2004 South-Western. All rights reserved.

11. External Environmental Analysis
A continuous process which includes
Scanning for early signals of potential changes and trends in the general environment
Monitoring changes to see if a trend emerges from among those spotted by scanning
Forecasting projections of outcomes based on monitored changes and trends
Assessing the timing and significance of changes and trends on the strategic management of the firm
Copyright © 2004 South-Western. All rights reserved.

12. Components of the External Environmental Analysis
Copyright © 2004 South-Western. All rights reserved.
Table 2.2

13. General Environment (cont’d)
The Economic Segment
Inflation rates
Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Business savings rates
Gross domestic product
Copyright © 2004 South-Western. All rights reserved.

14. General Environment (cont’d)
The Sociocultural Segment
Women in the workplace
Workforce diversity
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences
Copyright © 2004 South-Western. All rights reserved.

15. General Environment (cont’d)
The Global Segment
Product innovations
Applications of knowledge
Focus of private and government-supported R&D expenditures
New communication technologies
Copyright © 2004 South-Western. All rights reserved.

16. General Environment (cont’d)
The Technological Segment
Product innovations
Applications of knowledge
Focus of private and government-supported R&D expenditures
New communication technologies
Copyright © 2004 South-Western. All rights reserved.

17. General Environment (cont’d)
The Political/Legal Segment
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies
Copyright © 2004 South-Western. All rights reserved.

18. General Environment The Demographic Segment Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
Copyright © 2004 South-Western. All rights reserved.

19. Industry Environment Industry Defined
A group of firms producing products that are close substitutes
Firms that influence one another
Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns
Copyright © 2004 South-Western. All rights reserved.

20. The Five Forces of Competition Model
Copyright © 2004 South-Western. All rights reserved.
Figure 2.2

21. Threat of New Entrants: Barriers to Entry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation
Copyright © 2004 South-Western. All rights reserved.

22. Barriers to Entry Economies of Scale
Marginal improvements in efficiency that a firm experiences as it incrementally increases its size
Advantages and disadvantages of large-scale and small-scale entry
Copyright © 2004 South-Western. All rights reserved.

23. Barriers to Entry (cont’d)
Product differentiation
Unique products
Customer loyalty
Products at competitive prices
Capital Requirements
Physical facilities
Inventories
Marketing activities
Availability of capital
Copyright © 2004 South-Western. All rights reserved.

24. Barriers to Entry (cont’d)
Switching Costs
One-time costs customers incur when they buy from a different supplier
New equipment
Retraining employees
Psychic costs of ending a relationship
Copyright © 2004 South-Western. All rights reserved.

25. Barriers to Entry (cont’d)
Access to Distribution Channels
Stocking or shelf space
Price breaks
Cooperative advertising allowances
Cost Disadvantages Independent of Scale
Proprietary product technology
Favorable access to raw materials
Desirable locations
Copyright © 2004 South-Western. All rights reserved.

26. Barriers to Entry (cont’d)
Cost disadvantages independent of scale
Proprietary product technology
Favorable access to raw materials
Desirable locations
Government policy
Licensing and permit requirements
Deregulation of industries
Copyright © 2004 South-Western. All rights reserved.

27. Barriers to Entry (cont’d)
Expected retaliation
Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)
Copyright © 2004 South-Western. All rights reserved.

28. Bargaining Power of Suppliers
Supplier power increases when:
Suppliers are large and few in number
Suitable substitute products are not available
Individual buyers are not large customers of suppliers and there are many of them
Suppliers’ goods are critical to buyers’ marketplace success
Suppliers’ products create high switching costs.
Suppliers pose a threat to integrate forward into buyers’ industry
Copyright © 2004 South-Western. All rights reserved.

29. Bargaining Power of Buyers
Buyer power increase when:
Buyers are large and few in number
Buyers purchase a large portion of an industry’s total output
Buyers’ purchases are a significant portion of a supplier’s annual revenues
Buyers can switch to another product without incurring high switching costs
Buyers pose threat to integrate backward into the sellers’ industry
Copyright © 2004 South-Western. All rights reserved.

30. Threat of Substitute Products
The threat of substitute products increases when:
Buyers face few switching costs
The substitute product’s price is lower
Substitute product’s quality and performance are equal to or greater than the existing product
Differentiated industry products that are valued by customers reduce this threat
Copyright © 2004 South-Western. All rights reserved.

31. Intensity of Rivalry Among Competitors
Industry rivalry increases when:
There are numerous or equally balanced competitors
Industry growth slows or declines
There are high fixed costs or high storage costs
There is a lack of differentiation opportunities or low switching costs
When the strategic stakes are high
When high exit barriers prevent competitors from leaving the industry
Copyright © 2004 South-Western. All rights reserved.

32. Interpreting Industry Analyses
Low entry barriers
Suppliers and buyers have strong positions
Unattractive Industry
Strong threats from substitute products
Intense rivalry among competitors
Low profit potential
Copyright © 2004 South-Western. All rights reserved.

33. Interpreting Industry Analyses
High entry barriers
Suppliers and buyers have weak positions
Attractive Industry
Few threats from substitute products
Moderate rivalry among competitors
High profit potential
Copyright © 2004 South-Western. All rights reserved.

34. Strategic Groups Defined
A set of firms emphasizing similar strategic dimensions and using similar strategies
Internal competition between strategic group firms is greater than between firms outside that strategic group
There is more heterogeneity in the performance of firms within strategic groups
Copyright © 2004 South-Western. All rights reserved.

35. Strategic Groups Strategic Dimensions
Extent of technological leadership
Product quality
Pricing Policies
Distribution channels
Customer service
Copyright © 2004 South-Western. All rights reserved.

36. Competitor Analysis Competitor Intelligence
The ethical gathering of needed information and data that provides insight into:
A competitor’s direction (future objectives)
A competitor’s capabilities and intentions (current strategy)
A competitor’s beliefs about the industry (its assumptions)
A competitor’s capabilities
Copyright © 2004 South-Western. All rights reserved.

37. Competitor Analysis Components
Copyright © 2004 South-Western. All rights reserved.
Figure 2.3